Hedging stocks with oil

By Jonathan A. Batten, Harald Kinateder, Peter G. Szilagyi, Niklas Wagner. 2019

163 citations recorded by the source corpus.

Abstract We study the feasibility of hedging stocks with oil. The Dynamic Conditional Correlation (DCC) approach allows for the calculation of optimal hedge ratios and corresponding hedge portfolio returns. Our results show that there are distinct economic benefits from hedging stocks with oil, although the effectiveness of hedging is both time-varying and market-state-dependent. The event of the Global Financial Crisis (GFC) is shown to affect the effectiveness of hedging. During the GFC, a positive jump in the hedge ratios occurs and hedge effectiveness increases. Among a set of common financial and macroeconomic drivers, we identify the implied volatility index VIX as being the most important. During times of global financial uncertainty, investors reduce stock positions more than commodity positions, thus VIX shocks negatively affect the portfolio returns of stock-oil hedges. The results also show that an appreciation of the U.S. dollar against the euro is associated with reduced hedge portfolio returns. From the GFC onwards, we document an increased significance of the gold price and the term spread in explaining hedge portfolio returns.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/fc7c58feff8549edea9d689d091ae9d6579e9980

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

1. Tareq Saeed
2. D. Tran
3. Elie Bouri
4. David Roubaud
5. Rangan Gupta
6. Andrew Urquhart
7. Afees A. Salisu
8. Qiang Ji

In Finance

1. Tareq Saeed
2. D. Tran
3. Elie Bouri
4. Afees A. Salisu
5. Kazeem O. Isah

Citations in the corpus

• Is Gold a Hedge or Safe Haven Asset during COVID–19 Crisis? (2020, unknown): “These results are consistent with prior literature (Batten et al., 2019). Hussain Shahzad et al. (2020) find hedging effectiveness of gold is better than that of bitcoin for several G7 stock indices. Charfeddine et al. (2020) find the hedging effectiveness for a portfolio of gold and bitcoin.”
• Financial contagion during COVID–19 crisis (2020, unknown): “The Unprecedented Stock Market Impact of COVID-19, NBER Working paper N° 26945. Batten, J. A., Kinateder, H., Szilagyi, P. G., & Wagner, N. F. (2019). Hedging stocks with oil. Energy Economics, 104422. doi:https://doi.org/10.1016/j.eneco.2019.06.007 Bloomberg. (2020). Perfect storm plunges Asia stoc”
• Hedging Strategies of Green Assets against Dirty Energy Assets (2020, background): “Thirdly, the current study conducts practical portfolio analyses through examining hedge ratios and hedging effectiveness [19] in a time-varying setting, which is very appreciated by academics and investors.”